Why sellers of steady and profitable UK businesses shouldn’t ignore Family Offices

As business owners in the UK find it increasingly difficult to attract investment or struggle to attract the right kind of buyer as they look to exit their companies, one particular class of buyer could emerge as a valuable option: family offices.

While far less heralded for their investments in UK businesses than the likes of private equity firms and venture capital, family offices are still active participants in UK M&A and their activity has been increasing steadily over the past decade.

We often discuss the contribution of private equity to M&A activity in the UK, and with good reason – as private capital is the major driver of activity in many sectors (particularly highly fragmented industries or industries undergoing rapid consolidation).

While private equity still has a vital role to play in driving UK M&A through the current economic headwinds, competition to attract PE funding is fierce and it will not be a viable recourse for many business owners.

Furthermore, given the turbulence that owners have experienced over recent years, many owners seeking new funding or a sale may be keen to ensure that any incoming parties will be able to provide stability for themselves (if they are providing funding) or for their workforce (if they are seeking to exit).

While private equity can provide considerable financial power that can enable a business to grow/build scale and resilience, PE firms will typically seek to exit their investment within a few years – meaning the possibility for a lack of long-term stability for the business.

The increase in sales to Employee Ownership Trusts (EOTs) demonstrates the fact that many business owners are looking to hand their businesses over to new owners that will retain their brand, workforce and overall company ethos - something that is far from guaranteed with private equity.

Family offices, however, typically hold onto their investments far longer than private equity firms - meaning a greater focus on the long-term sustainability of the business, rather than merely prioritising short-term profit growth with an eye to exiting. As a result, despite their relative lack of exposure, family offices should be considered a useful option for outgoing owners or businesses seeking long-term investment.

What are family offices?
The reason why family offices don’t get the level of attention that other investors do is incredibly simple: it’s because they actively avoid this degree of exposure. True to their name, family offices manage the wealth investments of an ultra-high-net-worth individual, family, or families within a single dedicated team.

Historically, Family Offices have participated in the private market as investors through venture capital and private equity funds as Limited Partners. Yet, in recent times, Family Offices have been engaging in the private market more autonomously. They are not solely relying on investment funds to invest in the private market but are directly investing in private companies.

Over 60 percent of Family Offices with private equity investments have a portion of them in private assets (UBS Global Family Office Report). The families behind Family Offices often possess valuable business operational expertise, making this trend logical. The same expertise that helped them accumulate wealth through family ventures enables them to seize opportunities in the private market today. Many families and their Family Offices are recognising this, prompting them to invest actively. Angelo Robes, Founder and CEO of the US-based Family Office Association, observes, “We’re seeing direct investing playing a larger and larger role in the portfolios of a growing number of single-family offices. Globally, all signs point to single-family offices investing billions upon billions of dollars in acquiring privately held businesses.”

When a family amasses substantial wealth, either through a family-owned business or a successful corporate career, they often establish a Family Office to manage this wealth. A Family Office serves as an operational entity for a family’s assets, providing more privacy and personalised service compared to traditional wealth managers. It typically manages the family’s financial and legal affairs and assembles an investment team to safeguard and enhance the family’s significant wealth for future generations. The Family Office collaborates closely with the family on investment decisions and is often led by a family member. Ernst & Young estimates that there are “at least 10,000 single-family offices” globally, managing over £3 trillion of investable assets.

Family offices are generally divisible into two main types: Single Family Offices (SFOs), which deal with the affairs of a single family or individual; and Multi Family Offices (MFOs), which will handle the affairs of several separate families. With MFOs, while the families will be unrelated, their resources and expertise may be pooled in order to provide a wider range of investment opportunities and more cost-effective services.

Family offices offer the traditional services provided by wealth management firms, such as financial planning and investment management, but, due to their focus on a far narrower client base, also offer a wide range of other services. In general, the key services provided by family offices are:

Wealth Management - Family offices will oversee and manage the family's assets, potentially including investments in stocks, private equity, real estate, hedge funds, and other asset classes.

Estate Planning - Family offices will assist with estate planning, including the transfer of wealth between generations, often helping to minimise the taxes incurred and helping to ensure the family's financial legacy.

Tax Optimisation - Family offices will work to optimise their clients’ tax strategies, which may involve complex tax planning and compliance issues.

Asset Protection – Family offices will seek to protect the family's assets from legal and financial risks, often through measures such as setting up trusts and other legal structures.

Multi-Generational Support - Family offices are often designed to serve multiple generations of one wealthy family, providing continuity in wealth management and addressing the diverse (and sometimes diverging) needs of different family members.

In addition to these core concerns, family offices can also provide services such as managing a family’s philanthropic activities and charitable donations, with many ultra-high-net-worth individuals and families often having their own foundations set up for specific causes, as well as more personalised, concierge-style services, such as education planning, travel arrangements and lifestyle management.

Due to their focus on one or, at most, a handful of clients, a major priority of family offices will be succession and legacy planning – including services concerning factors such as estate taxes, management of trusts, dispute governance between family members and educating younger generations on wealth management, among many other things.

This focus on preserving wealth across generations means that family offices need to be totally on the ball about which areas or sectors to invest their clients’ funds in, with a need to focus on both short and long-term value.

From an M&A perspective, this perhaps leads to the key difference between family offices and other investors such as private equity firms. Whereas private equity investors will typically seek to exit their investment after around five years, family offices target significantly longer-term investments.

Family offices and M&A
Naturally, due to their stewardship of enormous wealth and the onus on maximising this, family offices often take part in M&A activity and make significant amounts of strategic investments in companies and assets across a range of industries. Some family offices will have M&A specialists or professionals with expertise in specific industries, which may be utilised to identify high-growth areas for M&A or to deliver operational improvements and value creation at companies they acquire.

Family offices pursue M&A activity for a variety of reasons. Family offices will target deals in order to a) diversify investment portfolios by acquiring or investing in companies across a range of industries in order to build a strong, multifaceted portfolio of investments, and b) for wealth preservation, by investing in businesses with high growth potential, generating strong returns on investments and protecting a family’s wealth against inflation and economic downturns.

Of course, probably the main motivating factor behind family office M&A will be income generation, with investments in and acquisitions of profitable, high-growth businesses or assets helping to generate strong, long-term income and cash flow, which can then be used for further investments, philanthropy or just to support the family.

M&A can also play a key role in generational wealth transfer, with acquisitions likely to take into account the family’s long-term goals and be undertaken with the intention that the acquisition will be held on to for a considerable amount of time, perhaps with no timescale at all on when it might be sold – as opposed to private equity acquisitions, in which the view will be to grow the acquired company, before disposing of it after 5-7 years.

These extensive hold times, combined with the financial heft of their clients, meant that family offices have remained active acquirers over the past few years, even amidst the disruption of the COVID-19 pandemic and the subsequent economic uncertainty that has gripped much of the world.

Overall, given the fundamental differences between family offices and investors such as private equity houses, M&A undertaken by family offices will typically have distinct criteria from PE activity. While clients may delegate a significant amount of responsibility for identifying and acting on M&A opportunities to a family house, acquisitions will often reflect the family’s particular interests or values – such as investments or acquisitions with a green or socially responsible angle.

In terms of how family offices view their acquisitions, they can typically be divided into two types. Firstly, acquisitions that are seen as strategic investments, in which the aim is to gain exposure to an industry or market segment that can generate value without the need for operational involvement. This may include taking stakes in high-growth businesses, acquiring companies by backing a management buyout (MBO) or investing in real estate.

Secondly, if a family has a particular interest in a sector or their family office has some specific market expertise, then acquisitions may be undertaken in order to gain direct control of a company (or at least some degree of strategic influence), in order to drive strategic/operational changes and grow the company’s value.

Family offices will usually participate in M&A independently, but investments can also be made in collaboration with other parties, such as private equity firms or other family offices. Overall, a family office’s involvement in M&A will vary depending upon their specific goals, interests and the opportunities that are available on the market.

Family office M&A in the UK
Given their exclusive, narrow clientele, it’s no wonder that family offices are discrete operators and receive far less M&A coverage than the likes of private equity firms, but they are, nonetheless, active dealmakers.

Family offices typically operate through direct investments or investments in real estate, which provide the lengthy hold times and reliable income and solid profit growth that their clients are aiming to secure. In both of these areas, the UK is one of the top investment destinations for family offices.

According to a recent Price Waterhouse Coopers (PwC) study of family offices deals, the UK has been the most popular location for family offices M&A overall in the measured decade (2012 to 2021). PwC says there were 895 direct investments made by family offices in the UK, putting it far ahead of Germany, which was the next closest destination with 580 direct investments over the decade, and France with 407. Surprisingly, the USA came in a distant fourth in the rankings, with just 278 direct investments over the course of the decade.

Interestingly, the UK also ranked second for real estate transactions over the course of the decade, with 281 family offices real estate deals, behind only the USA with 371. PwC’s study also tracked city hot spots for family offices investments, with London ranking second for real estate deals with 147 (behind Miami with 160) and top for private equity investments with 392 (more than two times the number of deals seen in second placed Berlin, which had 168). London also ranked top for family real estate investment in several key sectors, including office real estate, multi-family and hospitality.

Earlier this year, the UK Value Boxes fund, a Savills Investment Management fund backed by the family office of ARA founder John Lim and Singapore conglomerate Straits Trading, acquired four UK retail park assets in a deal valued at £75 million ($97.6 million).

The four retail parks, which represent the fund’s first acquisitions, include two in England and one each in Wales and Scotland and were acquired for a combined yield of close to 7.5 percent, according to a statement from Savills IM.

Harry de Ferry Foster, Head of UK, Fund Director, Savills IM, commented: “These acquisitions will provide a strong yield profile to our investors and exposure to a variety of household names as tenants off very low rents.”

“The UK retail parks sector continues to demonstrate resilience to e-commerce trends given the high proportion of daily necessity and value-oriented items, and we look forward to making further purchases in the future to ensure the Fund is fully invested.”

Even amid the COVID-19 pandemic, the UK continued to see strong M&A activity involving family offices, with private equity family office transactions growing 20.5 per cent in the UK between 2020 and 2021, while real estate transactions soared by 123.1 per cent during the same period.

Healthcare/biotech
While family offices may do the bulk of their deals in the real estate space, the sector that has emerged as the most valuable in terms of M&A activity is healthcare and biotech. Although no doubt boosted by the impact of the COVID-19 pandemic and the subsequent increasing focus on health and advances in medical technology, the sector has been a key one for family offices across the past decade.

PwC’s report shows that the sector recorded the highest deal value of any between 2012 and 2021, with a total deal value of $255.9 billion (approx. £210.3 billion in 2023), far ahead of the next most valuable sectors of retail and consumer goods ($143.9 billion) and automotive and industrial products ($142.5 billion).

What is particularly interesting about these figures is that this enormous deal value was generated off a deal volume of just 582 transactions during the decade. While this was the third highest deal volume of any sector, it still lagged far behind the computer, electronics & optical products sector (which saw 1,044 transactions) and real estate (1,698 transactions). Despite this, real estate saw deal value of just $96.5 billion and computer, electronics & optical products $101.4 million, demonstrating the huge value that family offices place on healthcare and biotech.

As with real estate, this is a trend that is positioning the UK as a key investment hub for family offices, with the country one of the leading healthcare and medtech markets in Europe. The UK’s strength in this industry is centred around the healthcare “golden triangle” of London, Oxford and Cambridge. Interestingly, in PwC’s ranking of the top 10 cities globally for family office private equity investments between 2012 and 2021, Cambridge – which is hardly one of the UK’s leading cities in any area outside of academia and healthcare – was ranked tenth worldwide – the only UK city in the top 10 after London.

In 2023, ASV Private Office, a London-based family office headed by Simon Vumbaca, was launched. The company targets sustainable growth across a number of sectors, including healthcare, technology, energy, infrastructure and entertainment.

Outlining its M&A strategy, the firm writes: “The current portfolio is constructed to be diversified across a range of geographies and incorporates complementary synergies across ASVPO’s core sectors. ASVPO targets high-potential businesses in the same sectors using proprietary technology and an industrialist mindset to assess deals and to identify opportunities for value creation.”

In August, ASV appointed Kate Fried as General Counsel as it seeks to ramp up its acquisitive activity in the UK and beyond. Fried has worked with the likes of Macquarie and Hutchison Telecom on cross-border M&A and project finance deals.

Simon Vumbaca commented that Fried “further bolsters our blue-chip experience having acted on transactions and businesses spanning multiple geographies”, adding: “She will reinforce the rigour of our origination, M&A and portfolio management activity and is a fantastic values-driven, strategic thinker.”

Family offices team up to cement deals
One of the main hurdles that dealmakers of all types are facing is balancing their appetite for acquisitions with the heightened economic risk that is currently present on the market. While this may lead to some pausing their acquisition plans, this is shortsighted, with acquisitions conducted during downturns and recessions often delivering the most value.

Family offices seem to have largely recognised this truth and many have adapted their dealmaking processes accordingly – enabling them to continue their acquisitive activity and even to target bigger deals than ever before.

A key facet of this change has been the increase in deals in which family offices team up with another party – such as a fellow family office or a private equity firm – in order to collaboratively strike deals (often labelled “club deals”) and share risk.

Over the past decade, the rise of such deals has been meteoric. While increasing family office activity overall has seen the number of sole deals (deals or investments made by a single family office) roughly double, the number of club deals have increased by almost 25 times during the same period. This reached its peak in 2020, no doubt spurred on in part by the challenges posed by COVID-19, when there were 308 club deals. Compared with the 626 sole deals in the same year, this means club deals accounted for approximately a third of the year’s total.

As well as heightened risk, the sustained increase in club deals over the past decade can also be linked to the growing tendency for family offices to target bigger and bigger transactions – with club deals meaning that resources can be pooled and higher value deals targeted. In 2012 and 2013, there were zero recorded family office transactions valued at more than $2.5 billion, followed by just one in 2014 and two in 2015. By 2021, however, this figure had increased to 20.

During the same period, the number of transactions valued at between $1 billion and $2.5 billion increased from three in 2014 to 23 in 2021.

PwC stated: “The main drivers behind the rise of club deals are the increasing size of investments – meaning more investors are needed to contribute the required capital – and the desire to diversify risk exposures. In an uncertain world, family offices are increasingly keen to share the risks and rewards around their investments.”

Conclusion - Selling to a family office
For owners of businesses with stable profits, the increase of Family Office M&A activity in the UK over recent years demonstrates that, when they decide to exit their business, Family Offices should be considered potential buyers. Moreover, they should evaluate whether a Family Office’s investment approach aligns with their business objectives and goals.

Family Offices usually prefer investing in companies where they can assume a proactive and engaged role. Sixty-four percent of Family Offices (UBS & Campden Wealth Report) mentioned “level of control” as a crucial factor when investing in a private company. This hands-on approach usually translates into outperformance.

This is favourable for entrepreneurs planning to exit their venture and owners wishing to step back from firm operations. Conversely, business operators seeking some growth capital might find their goals misaligned with some Family Offices. Unlike many private equity investors, Family Offices often have a long-term investment outlook. They are “patient capital providers,” content with holding well-performing investments, looking beyond short-term market variations. This ensures that after selling their company, decisions will be made with a long-term sustainability focus, alleviating concerns of business owners about their company being hastily sold off or employees being laid off.

Identifying the right buyer is as much about cultural and strategic alignment as it is about financial valuation. Irwin Latner, a partner at Pepper Hamilton LLP, notes that Family Offices are essentially operators keen on owning and growing companies.

When business owners decide to step away from their long-nurtured companies, they often desire to hand it over to competent and caring hands. Family Offices, with their right intentions and extensive experience, are well-positioned to meet this challenge, making them a viable option for many business owners contemplating divestiture.

Hence, corporate finance houses and business brokers should include Family Offices in their buyer pool when marketing a company. A proficient adviser will have resources to assess Family Offices and other buyers not merely based on size but also industry focus and expertise, ensuring that a target business transitions to capable hands who appreciate the value of what has been built.

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